NCPA - National Center for Policy Analysis

Financial Accounting Standards Board Delivers Gift To Tort Bar

August 18, 2010

In the eternal war between the plaintiffs bar and corporations, the lawsuit pack already owns the Senate and many state courts.  Now it seems the nation's accountants want to give the lawyers another edge, according to the Wall Street Journal. 

The Financial Accounting Standards Board (FASB) will soon begin considering whether to require companies to account for the potential cost of ongoing litigation.  Supporters insist this is merely about disclosure, but the proposal would hurt investors by offering roadmaps for new litigation and bigger settlements.  Since 2008 the FASB has retreated amid a business backlash.  But FASB's revised proposal, issued last month, isn't much better, says the Journal. 

Take the provision requiring companies to disclose their liability insurance coverage: 

  • Lawyers would be able to target their damage requests to the coverage maximum, or launch new lawsuits in the knowledge that more insurance dollars remain.
  • This is why judges typically insist that coverage only be divulged under a secrecy order. 

Another provision proposes that companies disclose the "average settlement amount" in various categories of litigation: 

  • This is another bull's-eye for the trial bar, which will seek to meet or exceed that figure in each of its demands.
  • It also sets a prejudicial standard for all companies in similar litigation to meet.  

And don't forget proposed disclosure of "the existence of studies in reputable scientific journals . . . that indicate potential significant hazards related to the entity's products or operations."  So corporate America would be obliged to do the trial bar's research: 

  • Disclosure about concrete liabilities is helpful to investors, but the new FASB rules would force companies to divulge snapshot details of ongoing litigation that put investors at greater risk of loss.
  • This is what separates FASB's litigation proposals from its worthier provisions to require companies to disclose their multi-employer pension costs.
  • Corporations already face those retirement liabilities. 

FASB has shown a tendency, once it initiates a project, to stubbornly insist on plowing ahead, as if it is the sole authority on virtuous disclosure.  For once it should consider the fierce business reaction to its litigation proposal -- and the evidence of its harm to shareholders -- as reason to return this one to the drawing board, says the Journal. 

Source: Editorial, "FASB's Tort Bar Gift," Wall Street Journal, August 18, 2010.   

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